Cooperatives Working Together uses herd retirement to fix milk prices

Joe Sonneker is the prototype of a Midwestern dairy farmer. Layered in flannel and a tan Carhartt jacket, his hulking physique bespeaks a man who has spent nearly his entire 64 years performing chores, a student of hard labor since he was old enough to carry feed.

"I guess I never thought of doing anything else, really," he says.

On a January afternoon, he trudges through snow on his farm in Melrose, a small town 100 miles northwest of Minneapolis. More than a century ago, Sonneker's grandfather cleared the 160-acre lot and started the small dairy farm that would be passed down for generations. But when Sonneker opens the door to a barn once used to milk cows, all that's left is cement and the lingering smell of manure.

Three years ago, Sonneker sold his entire herd to be slaughtered through a program euphemistically titled "herd retirement." Orchestrated by Cooperatives Working Together—a collective of America's biggest dairy co-ops, including Arden Hills-based Land O'Lakes—herd retirement slaughtered more than 500,000 dairy cows between 2003 and 2010 for one purpose: raising the price of milk.

It was a booming success. An independent analysis projects the dairy industry profited $11.7 billion off herd retirement. But critics point to the tremendous waste.

"I think that's the overriding reaction that I sensed: What are they doing?" says Jerry Dryer, one of the premier dairy market analysts in the country, of the program's critics. "Why aren't we marketing this product? There are hungry people here, there are hungry people overseas. Why are we restricting production?"

Last fall, the dairy consortium was served with a civil lawsuit alleging that herd retirement violates anti-trust laws. According to the suit, Land O'Lakes and other members of the co-op colluded in an illegal price-fixing scheme that cheated American consumers out of billions of dollars.

Critics of Big Dairy say herd retirement is symptomatic of an industry almost unrecognizable from what it was 30 years ago. As small family farms like Sonneker's disappear, they're replaced by massive operations designed to produce at high volume. The once-modest farmer cooperatives have turned into nationwide conglomerates that dominate the market.

For the consumer, the timing of herd retirement was particularly galling. Since the economic downturn in 2008, food costs and hunger have affected a growing number of Americans, says Chris Waldrop, director of the Food Policy Institute at the Consumer Federation of America.

"The economy was down—more people were out of work, more people were relying on food stamps," Waldrop says. "If prices rise on a staple like that, it makes it harder for consumers to put food on the table."

Herd retirement may be the most advanced attempt to control the dairy market in history, but it's far from the first.

During the Great Depression, Wisconsin farmers famously protested low prices by dumping milk by the barrel. The demonstrations resulted in an iconic photo depicting hundreds of empty barrels, stacked up in an arid landscape next to a set of train tracks, soaked in white liquid.

The government's response to plunging prices was to institute a floor on how low they could fall. When the price of dairy dipped below a level tied to the market, the government intervened and bought the excess. For four decades, the system helped maintain stable prices.

"It was a way of making a living," says Land O'Lakes farmer Pat Lunemann, who grew up in a neighborhood of successful small farms. "It was a time when just about everyone could milk cows and make it work."

By the early 1980s, the price-support program was bursting at the seams. With no limit on how much the government would buy, farmers flooded the market. The feds bought cheese, butter, and dry milk products by the truckload, filling limestone caves in Kansas City and empty naval ships on the Hudson River. At its peak, the U.S. had about a billion pounds of butter, a billion pounds of nonfat dry milk, and 500 million pounds of cheese in storage. In 1983 alone, taxpayers spent $2.7 billion to buy, ship, and store the surplus dairy. Dan Block, secretary of agriculture under Ronald Reagan, called the system "embarrassing, unacceptable, and intolerable."

The solution was the Dairy Diversion Program, which encouraged farmers to slow down production. When that didn't work, the USDA started the Dairy Termination Program, an ambitious, short-term project meant to reduce the number of milk-producing cows. It gave farmers the option to sell their entire herds for export or slaughter, if they agreed not to get back into dairy farming for at least five years. With good buyout prices on the table, 40,000 dairy farmers bid for inclusion. Ultimately the federal government accepted 14,000 bids, paying out $1.8 billion to remove 1.6 million dairy cows from production between April 1986 and September 1987.

But despite the dramatic numbers, the termination program didn't have a lasting effect on milk prices. Part of the problem was that farmers not involved with the program simply increased their herd sizes and production output to make up the difference.

"What happened in both of those is that you get some very impressive short-run impacts, but when the program is over, milk production comes roaring back," says Don Blayney, an agricultural economist with the USDA.

As the federal government attempted to solve the overproduction problem, the dairy industry became increasingly concentrated in the hands of a few huge cooperatives. Farmer-owned co-ops, originally created as a way for dozens of farmers to negotiate with wealthy buyers in Chicago and New York, had grown into nationwide consortiums representing thousands of farmers.

One of the fastest-growing was Land O'Lakes, which carried out an aggressive strategy of mergers and acquisitions throughout the 1990s. After scooping up smaller dairy outlets in the Northeast and the South, Land O'Lakes looked west. When company scouts approached Jack Prince, CEO of Dairymen's Cooperative of California, to propose a merger in 1998, the attraction was obvious.

"They were aware of the fact that California was growing by leaps and bounds," says Prince, who went on to serve as a vice president at Land O'Lakes. "They felt that in the long term, they wouldn't be able to compete without a presence in California."

With the merger, Land O'Lakes solidified itself as a national player in the dairy industry, joining its fellow behemoths like Dairy Farmers of America. "It's the way of the business world," says Corey Corey Geiger, an editor at renowned industry magazine Hoard's Dairyman. "Co-ops consolidate so they have greater marketing strength, because ultimately they've got to be able to negotiate with the Walmarts of the world."

Cooperatives have consistently used this claim as a reason for their need to dominate the market, but there is reason for skepticism, says University of Wisconsin Law School professor Peter Carstensen, who points to Land O'Lakes' recent acquisition of a butter plant in Madison.

"Within a year and a half they shut the plant down, depriving dairy farmers of an outlet for their milk," Carstensen says. "You could look at it and say, 'Hmm, Land O'Lakes has a very large butter operation, this is another competitor, and now they're closed down.'"

Even with their bargaining strength, big co-ops were still at the whim of the market. Since the reduction of government price supports in the 1980s, milk prices had become ever more volatile.

"It seems like we'd have a good year, then a decent year, and then the year from hell," Luneman says.

In 2002, milk prices plummeted and stayed down. In May 2003, the all-milk price—which includes Grade A milk sold for drinking and Grade B milk used in butter and cheese—was at its lowest point since 1978.

Just a month later, Cooperatives Working Together launched its website, asking co-ops and individual dairy farmers to join. The consortium plainly stated that its goal was to increase the price of milk, and trumpeted the singular power it had over the dairy market. By the time it enacted herd retirement, the organization had signed enough co-ops and independent producers to account for more than 70 percent of the country's milk production.

"The 70 percent number is very interesting," says University of Connecticut economist Ronald Cotterill. "Generally it's thought that when you get up to 70 percent or more, you definitely have a dominant position in that market."

The need for farmers to leverage their numbers against wholesalers is obvious to Roger Allbee, former secretary of agriculture in Vermont. But consolidation in the production and retail side of the dairy industry doesn't help everyone.

On the fall morning when the visitor arrived, David Gilbertson was already outside waiting. Gilbertson entertained small talk as he showed the man to his barn, but he knew the task at hand was anything but pleasant.

The stranger had come to Farwell, a farming village an hour east of the South Dakota border, on behalf of Cooperatives Working Together. Once the man got into the barn, he produced a series of purple tags to clip onto the ears of the 45 cows, marking them for death.

"It was hard, emotionally," Gilbertson recalls. "If it's young cows that have a lot of promise as a milk cow, that's hard."

After Cooperatives Working Together accepted Gilbertson's bid, he arranged for the cows to be taken to Belgrade Meat Center, a slaughterhouse in a nearby town. Per the terms of the herd buyout agreement, the cows had to be slaughtered within 15 days, which would be confirmed by the visit of a second auditor.

"I don't know what they did with 'em," Gilbertson says. "I've often wondered that."

After being slaughtered at Belgrade, the cows were likely ground into meat and sold off a dollar menu. The meat from a dairy cow is of a lower quality than beef cattle raised and fattened its whole life, so the meat is often used as hamburger at fast-food restaurants.

By the time Gilbertson's herd was slaughtered in fall 2005, the consortium was finishing up its third round of herd retirement. Collectively, about 147,000 cows from more than 1,000 farms across the country had been slaughtered.

"We are pleased with the size program we were able to execute," announced Jerry Kozak, president and CEO of National Milk Producers Federation, the Virginia-based industry lobbying group that organized and ran Cooperatives Working Together. "This is our biggest retirement to date."

The organization killed another 52,783 cows by June 2007. The slaughter coincided with a dramatic rise in milk prices. From January to July that year, the all-milk price rose by almost 50 percent. In November, the all-milk price peaked at an all-time high, earning farmers $21.90 per hundred pounds.

On the heels of its success, Cooperatives Working Together decided to up the ante. The next year, the group began accepting heifers—young cows not yet producing milk. During two herd retirements announced that year, more than 75,000 cows were slaughtered. Milk prices stayed strong during the first half of 2008, falling just slightly in August and September.

In October 2008, the credit crisis and the collapse of the global economy sunk milk prices into their most prolonged period of month-to-month decline ever recorded. International demand for American dairy products dried up almost instantly.

The next year, the dairy consortium launched a rapid succession of herd retirements. In all, 200,493 milk cows were butchered or designated for slaughterhouses that year, including thousands of heifers, removing nearly four billion pounds of milk from the market.

Prices rebounded in 2010, but Cooperatives Working Together went forward with another round of herd retirement that summer. In the press release announcing the upcoming slaughter, Kozak crowed that the group was responsible for the reduction in milk cow population the previous year, but that more was necessary.

At the completion of its 10th and final herd buyout, the dairy consortium had taken 506,921 milk cows out of production. Each was given a number and a purple tag and led to an early slaughter.

This eventually grabbed the attention of Compassion Over Killing, a nonprofit based in Washington, D.C., that makes headlines by publishing hidden-camera footage of factory farms.

"Our position is for people to realize just how unethical the dairy industry is," says Cheryl Leahy, general counsel for Compassion Over Killing. "This is just one more thing when they're cheating consumers by creating this scheme to unfairly and illegally jack up their profits—at the expense of cows, and the expense of consumers."

No commodity in the supermarket had a better 2011 than milk. With a 35 percent increase in price over 12 months, milk was the biggest gainer of the year, outpacing even oil and gold. Though a long list of factors influence milk prices, analysts say herd retirement played a significant role in the increase.

"Anytime you can tighten that milk supply up ... whether it's production or sales, you get a pretty good price response," says Bob Cropp, professor of agricultural economics at the University of Wisconsin-Madison.

In 2004, following the first year of herd retirements, the effect on the consumer was relatively modest, adding less than two cents a gallon to the all-milk price, according to an independent analysis of the program conducted by Scott Brown, a dairy economist from the University of Missouri. A rise in the farmer-to-processer price is eventually passed on to the consumer in a similar increase at the supermarket.

But as milk supply continued to decrease, the effects were more powerful. According to Brown's analysis, the herd retirement program increased the all-milk price by about 15 cents a gallon in 2010, and 12 cents per gallon in 2011.

The higher cost would be most noticeable to the poorest Americans, says Chris Waldrop of the Food Policy Institute. "I think it's clear that this program was designed to benefit the producers, and not the consumers," Waldrop says.

On February 28, Land O'Lakes will hold its annual meeting at the Hilton in downtown Minneapolis. Among the items on the agenda is how to lobby Congress for the importance of keeping the Capper-Volstead Act, the federal law that allows farmers to legally join co-ops. The law offers limited exemption from federal anti-trust laws, but it's not a free pass to manipulate the market, says Jason Foscolo, an attorney who specializes in agriculture cases.

"You can't have a bunch of guys sitting around a table smoking cigars saying, 'We're gonna cut production and show these Americans how dearly they're going to pay for their milk,'" says Foscolo.

The exemption has become the subject of heated legal debate in the past few years. When it was created in the 1920s, the average farmer co-op consisted of a few dozen neighbors who would gather in a living room once a month to pool resources. But in an age where a few giant co-ops control the industry, some believe Big Ag should be held to the same standards as Microsoft.

"Whenever one of these cases falls into the agricultural field, we have this argument," says Arthur N. Bailey, an attorney who has worked on similar cases. "And for the past 50 years, it worked, in most cases. But you watch, I'm predicting the end of that era of Capper-Volstead protection until you get clear to the marketing stage."

Cooperatives Working Together and Land O'Lakes declined to answer questions for this story. In a written statement, CWT Chief Operating Officer Jim Tillison denied the allegations in the lawsuit and vowed to vigorously defend the program.

"Cooperatives Working Together was created in 2003 as a self-help initiative to assist family dairy farmers and members of dairy cooperatives who were losing money producing milk," argues Tillison. "The program was designed and has always been operated in a manner fully consistent with the anti-trust laws of the United States."

Since the suit was originally filed in California, similar lawsuits have appeared in other states. If certified as a class action, the case will pit every American consumer of dairy products against more than 70 percent of the nation's production.

Because the dairy consortium and Land O'Lakes refused to be interviewed, it's impossible to know whether they plan to restart herd retirement in the future. For the moment, Cooperatives Working Together is focused on decreasing the national supply by arranging dairy exports to international markets.

Arranging exports has been part of the dairy collective's plan to increase milk prices since 2003, according to company documents. From 2003 to 2010, the success of exports paled in comparison to that of herd retirement, but that could be about to change. Dairy economists say the international sales, especially the previously untapped market in Asia, have become more profitable in recent years.

Analyst Jerry Dryer, who used to be a paid speaker at dairy industry events, couldn't help but remark upon the "schizophrenic" strategy. On one hand, the consortium was slaughtering hundreds of thousands of cows to reduce the supply. Now they want to grow the market for international trade.

"I kept urging them to figure out what they wanted to be when they grow up."

The East Dublin Dairy farm in Murdock, Minnesota, is home to more than 6,600 cows and heifers, making it among the largest in the region. Since 2008, farmers at East Dublin have milked 5,280 cows twice every day. The milk ships weekly by the truckloads.

This is the way that dairy farming is heading. As the small, generational family farmers have been forced out of the business, mega-farms are moving in. Just 20 years ago, there were 8,500 small farms in Minnesota. By 2007, that number was down to 2,000.

It makes sense in the age of Walmart and Costco. Bigger farms streamline production, and can afford better equipment and feed to maximize output. Large co-ops like Land O'Lakes also encourage the trend by giving better prices for volume and offering free hauling.

Big farms are also better equipped to weather bad years, says Land O' Lakes farmer Ron Miller, who recently upgraded from 150 to 1,600 cows. "We ran into some good prices where we were able to pay back a lot of our debt."

But bigger farms also bring bigger problems. With more cows on a smaller patch of land, environmental impacts multiply, including the risk of manure runoff into a community's watershed. Bigger farms also introduce a new potential for food contamination, says Mark Muller, program director for the Institute of Agriculture and Trade Policy.

"When there is an issue, you have millions of people who are affected by it rather than a couple thousand people affected by it," says Muller.

As farms have grown over the years, so has the volume of milk the individual cows are producing. At the same time herd retirement was slaughtering cows to decrease the milk supply, farmers were using genetics and hormones to increase production. In 1993, the average American dairy cow produced 15,722 pounds of milk per year; by 2007, output had increased to 20,204 pounds a year.

Dave Minar, the owner of Cedar Summit Farm in New Prague, has become an evangelist for a different way to think about dairy farming. In the early 1990s, Minar left a large regional co-op for a smaller local collective, and made radical changes to the way he ran his farm.

Minar's herd grazes outdoors on natural grasses seven months a year, and moves inside in the winter. The cows stay healthy and productive for 12 or more years, providing milk nearly twice as long as a typical dairy cow's entire lifespan.

Minar disagrees with the way the dairy industry treats its cows, shortening their lifespan by stuffing them with grain and selling them for slaughter when production drops. He's particularly disappointed with the herd retirements.

"Personally, on an ethical standpoint, I think it's unfortunate that they're selling their cows for slaughter," says Minar. "I don't think it's the right thing to do. It doesn't seem morally right, to me, to do that."